    [House Hearing, 110 Congress]
    [From the U.S. Government Publishing Office]

      H.R. 5712, CLOSE THE CONTRACTOR FRAUD LOOPHOLE ACT, AND H.R. 5787,
                 FEDERAL REAL PROPERTY DISPOSAL ENHANCEMENT ACT

    =======================================================================

                                    HEARING

                                   before the

                     SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                         ORGANIZATION, AND PROCUREMENT

                                     of the

                             COMMITTEE ON OVERSIGHT
                             AND GOVERNMENT REFORM
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED TENTH CONGRESS

                                 SECOND SESSION

                                       ON

                                   H.R. 5712

      TO REQUIRE DISCLOSURE BY FEDERAL CONTRACTORS OF CERTAIN VIOLATIONS
           RELATING TO THE AWARD OR PERFORMANCE OF FEDERAL CONTRACTS
                                     AND ON

                                   H.R. 5787

      TO AMEND TITLE 40, UNITED STATES CODE, TO ENHANCE AUTHORITIES WITH
      REGARD TO REAL PROPERTY THAT HAS YET TO BE REPORTED EXCESS, AND FOR
                                 OTHER PURPOSES

                                   __________

                                 APRIL 15, 2008

                                   __________

                               Serial No. 110-103

                                   __________

    Printed for the use of the Committee on Oversight and Government Reform

      Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                                   index.html
                         http://www.oversight.house.gov

                                  ----------
                             U.S. GOVERNMENT PRINTING OFFICE

    45-945 PDF                       WASHINGTON : 2008

    For sale by the Superintendent of Documents, U.S. Government Printing
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    Washington, DC 20402-0001

                  COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                     HENRY A. WAXMAN, California, Chairman
    EDOLPHUS TOWNS, New York             TOM DAVIS, Virginia
    PAUL E. KANJORSKI, Pennsylvania      DAN BURTON, Indiana
    CAROLYN B. MALONEY, New York         CHRISTOPHER SHAYS, Connecticut
    ELIJAH E. CUMMINGS, Maryland         JOHN M. McHUGH, New York
    DENNIS J. KUCINICH, Ohio             JOHN L. MICA, Florida
    DANNY K. DAVIS, Illinois             MARK E. SOUDER, Indiana
    JOHN F. TIERNEY, Massachusetts       TODD RUSSELL PLATTS, Pennsylvania
    WM. LACY CLAY, Missouri              CHRIS CANNON, Utah
    DIANE E. WATSON, California          JOHN J. DUNCAN, Jr., Tennessee
    STEPHEN F. LYNCH, Massachusetts      MICHAEL R. TURNER, Ohio
    BRIAN HIGGINS, New York              DARRELL E. ISSA, California
    JOHN A. YARMUTH, Kentucky            KENNY MARCHANT, Texas
    BRUCE L. BRALEY, Iowa                LYNN A. WESTMORELAND, Georgia
    ELEANOR HOLMES NORTON, District of   PATRICK T. McHENRY, North Carolina
        Columbia                         VIRGINIA FOXX, North Carolina
    BETTY McCOLLUM, Minnesota            BRIAN P. BILBRAY, California
    JIM COOPER, Tennessee                BILL SALI, Idaho
    CHRIS VAN HOLLEN, Maryland           JIM JORDAN, Ohio
    PAUL W. HODES, New Hampshire
    CHRISTOPHER S. MURPHY, Connecticut
    JOHN P. SARBANES, Maryland
    PETER WELCH, Vermont
    ------ ------

                         Phil Schiliro, Chief of Staff
                          Phil Barnett, Staff Director
                           Earley Green, Chief Clerk
                   Lawrence Halloran, Minority Staff Director

      Subcommittee on Government Management, Organization, and Procurement

                       EDOLPHUS TOWNS, New York, Chairman
    PAUL E. KANJORSKI, Pennsylvania      BRIAN P. BILBRAY, California
    CHRISTOPHER S. MURPHY, Connecticut   TODD RUSSELL PLATTS, Pennsylvania,
    PETER WELCH, Vermont                 JOHN J. DUNCAN, Jr., Tennessee
    CAROLYN B. MALONEY, New York
                        Michael McCarthy, Staff Director

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on April 15, 2008...................................     1
    Text of H.R. 5712................................................     6
    Text of H.R. 5787................................................     9
    Statement of:
        Denett, Paul, Administrator for Federal Procurement Policy,
          Office of Management and Budget; Barry Sabin, Deputy
          Assistant Attorney General, Criminal Division, U.S.
          Department of Justice; David Drabkin, Acting Chief
          Acquisition Officer and Senior Procurement Executive,
          General Services Administration; and Colleen Preston,
          executive vice president, Professional Services Council....    16
            Denett, Paul.............................................    16
            Drabkin, David...........................................    34
            Preston, Colleen.........................................    43
            Sabin, Barry.............................................    22
        Werfel, Danny, Acting Comptroller, Federal Financial
          Management, Office of Management and Budget; and Stan
          Kaczmarczyk, Acting Deputy Associate Administrator, Office
          of Government-wide Policy, General Services Administration.    77
            Kaczmarczyk, Stan........................................    83
            Werfel, Danny............................................    77
    Letters, statements, etc., submitted for the record by:
        Davis, Hon. Tom, a Representative in Congress from the State
          of Virginia, prepared statement of.........................    60
        Denett, Paul, Administrator for Federal Procurement Policy,
          Office of Management and Budget, prepared statement of.....    18
        Drabkin, David, Acting Chief Acquisition Officer and Senior
          Procurement Executive, General Services Administration,
          prepared statement of......................................    37
        Kaczmarczyk, Stan, Acting Deputy Associate Administrator,
          Office of Government-wide Policy, General Services
          Administration, prepared statement of......................    85
        Moore, Hon. Dennis, a Representative in Congress from the
          State of Kansas, prepared statement of.....................    75
        Preston, Colleen, executive vice president, Professional
          Services Council, prepared statement of....................    45
        Sabin, Barry, Deputy Assistant Attorney General, Criminal
          Division, U.S. Department of Justice, prepared statement of    25
        Towns, Hon. Edolphus, a Representative in Congress from the
          State of New York, prepared statement of...................     3
        Werfel, Danny, Acting Comptroller, Federal Financial
          Management, Office of Management and Budget, prepared
          statement of...............................................    80

      H.R. 5712, CLOSE THE CONTRACTOR FRAUD LOOPHOLE ACT, AND H.R. 5787,
                 FEDERAL REAL PROPERTY DISPOSAL ENHANCEMENT ACT

                                  ----------

                            TUESDAY, APRIL 15, 2008

                      House of Representatives,
                Subcommittee on Government Management,
                         Organization, and Procurement,
                  Committee on Oversight and Government Reform,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 2:05 p.m. in
    room 2247, Rayburn House Office Building, Hon. Edolphus Towns
    (chairman of the subcommittee) presiding.
        Present: Representatives Towns, Welch, Davis of Virginia,
    and Bilbray.
        Also present: Representative Moore.
        Staff present: Michael McCarthy, staff director; William
    Jusino and Mark Stevenson, professional staff members; Velvet
    Johnson, counsel; Kwane Drabo, clerk; Jim Moore and Charles
    Phillips, minority counsels; and Benjamin Chance, minority
    professional staff member.
        Mr. Towns. The committee will come to order.
        Welcome to today's legislative hearing on two bills related
    to contractor ethics and the disposal of Federal surplus
    property. The first bill we will review is H.R. 5712, the Close
    the Contractor Fraud Loophole Act, introduced by Representative
    Peter Welch.
        About a month ago Congressman Welch brought to the
    committee's attention a loophole in a new rule requiring
    contractors to report fraud and over-billing on Government
    contracts. For some reason, contracts performed overseas were
    exempted from that requirement. Well, that didn't make any
    sense to Congressman Welch because so much contract fraud and
    waste has been seen on contracts in Iraq and Afghanistan.
        So we have been looking into the policy behind that rule
    and how that exemption got into the rule in the first place.
    Congressman Welch introduced a bill to close the overseas
    loophole and another loophole exempting commercial items
    contracts.
        That bill is the topic of our first panel today. The rule
    in question requires contractors to report internal fraud or
    overpayment on Government-funded projects rather than wait for
    its discovery by the Government. The Department of Justice
    believed such a rule was necessary because few Government
    contractors voluntarily disclose suspected instances of fraud.
        However, the rule exempted contracts to be performed
    overseas and contracts for commercial items. This makes no
    sense at all. By exempting overseas contracts, this
    administration is telling Government contractors that if you
    are going to commit fraud, go abroad and do it. I am pleased
    that since Congressman Welch brought attention to this detail
    and introduced this bill and called for this hearing, it
    appears that the administration will now revise its proposed
    rule to include overseas and commercial items contracts in the
    fraud reporting requirements.
        That is a good step, but I think the Welch bill is still
    necessary to make sure these types of loopholes stay closed,
    and closed forever.
        H.R. 5712 will ensure that taxpayers' dollars are used for
    the purpose to which they have been appropriated, and not to
    line the pockets of corrupt individuals or companies. We take
    that responsibility very seriously. At this time when our
    national security is of paramount concern, criminals who cheat
    the Government must be identified, stopped, and punished.
        I look forward to hearing from our witnesses.
        Our second panel will discuss a bill by Representative
    Dennis Moore of Kansas to streamlining the sale of surplus
    Federal land. I will say more about that bill when it is time
    for the second panel.
        [The prepared statement of Hon. Edolphus Towns and the
    texts of H.R. 5712 and H.R. 5787 follow:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Towns. At this time I would like to yield time to
    Congressman Welch, the sponsor of this legislation.
        Mr. Welch. Thank you very much, Mr. Chairman. I want to
    thank Chairman Towns and I want to thank Chairman Waxman for
    restoring front and center the responsibility the Congress has
    to do oversight. That is especially important on the
    procurement process that has become a much bigger part of how
    Government spends taxpayers' dollars.
        Just a few facts, Mr. Chairman.
        In the year 2000, procurement spending was $203 billion. In
    the first 6 years of the Bush administration that grew to $412
    billion, the highest it has ever been in the history of the
    United States.
        Also, non-competitive procurement contracting has also
    exploded. The use of no-bid contracts and the use of limited
    competition contracts rose in the year 2000 from $67.5 billion
    to $206.9 billion in 2006, with the largest increase in a
    single year being between 2005 and 2006.
        Even as that happens, the incidents of documented waste,
    fraud, and abuse is also exploding. In a report that was done
    under the supervision of Chairman Waxman, ``More Dollars, Less
    Sense: Worsening Contracting Trends Under the Bush
    Administration,'' has documented that in 118 contracts valued
    at $745 billion that were found by Government auditors to
    involve very significant waste, fraud, abuse, or mismanagement.
    This year the report identifies 187 contracts valued at $1.1
    trillion that have been plagued by waste, fraud, and abuse.
    That raises the question as to how we will, as a Congress and
    as an administration, protect taxpayer dollars from waste,
    fraud, and abuse.
        The subject of this hearing is about a rule that was
    proposed that originally was going to do the obvious, and that
    was require contractors who are receiving literally billions of
    dollars of taxpayer money to report when they become aware of
    any incidents of fraud. That rule, from its original proposal,
    did the sensible thing to include that obligation whether the
    taxpayer money was spent in the United States or abroad, was
    ultimately promulgated with an exclusion for any expenditures
    of taxpayer dollars that were spent overseas. Of course, the
    dominant place where that money is spent is Iraq and, to some
    extent, in Afghanistan.
        The chairman laid out why that is not acceptable, but just
    a few examples of the really egregious fraud, waste, and
    mismanagement that has occurred are incidents in Iraq. Mr.
    Chairman, a few of us were able to go to the Baghdad Police
    Academy, where the contract wasted millions of taxpayer dollars
    building a facility that wasn't able to be occupied for its
    intended purpose. There was literally septic sewage that was
    leaking from second-story facilities into the first floor.
        Folks from the committee went to the Baghdad Police
    College, which I just mentioned. Another one was the dam at
    Mosul, where millions of dollars of equipment were just gone
    missing.
        There is item after item that have been documented, Mr.
    Chairman, in the report by this committee of taxpayer waste,
    fraud, and abuse which everybody opposes, so this rule that has
    allowed an exemption to continue can't be sustained.
        I thank you Mr. Chairman and yield the balance of my time.
        Mr. Towns. Thank you very much. I also thank you for the
    great work that you have done on this legislation.
        Let me introduce the members of the panel. Let me begin by
    introducing the Honorable Paul Denett, Administrator for
    Federal Procurement Policy, Office of Management and Budget.
    Thank you for coming.
        Mr. Barry Sabin, Deputy Assistant Attorney General for
    Criminal Division, U.S. Department of Justice. Thank you so
    much for coming.
        Mr. David Drabkin, Acting Chief Acquisition Officer and
    Senior Procurement Executive, General Services Administration.
    Thank you so much for coming.
        Ms. Colleen Preston, executive vice president of
    Professional Services Council. Thank you so much for being
    here.
        We will proceed with you, Mr. Denett. Let me just say that
    each of you have 5 minutes. Of course, we hope that you could
    sum up in 5 minutes. When the light goes to caution, we want to
    let you know you need to be sort of like winding up, and then
    when it gets to red, that means stop. Of course, after that we
    have a question and answer period.
        Before we do that, it is a longstanding policy here that we
    swear in all of our witnesses.
        [Witnesses sworn.]
        Mr. Towns. Let the record reflect that they all answered in
    the affirmative.
        We will begin with you, Mr. Denett.

         STATEMENTS OF PAUL DENETT, ADMINISTRATOR FOR FEDERAL
      PROCUREMENT POLICY, OFFICE OF MANAGEMENT AND BUDGET; BARRY
     SABIN, DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION,
        U.S. DEPARTMENT OF JUSTICE; DAVID DRABKIN, ACTING CHIEF
     ACQUISITION OFFICER AND SENIOR PROCUREMENT EXECUTIVE, GENERAL
     SERVICES ADMINISTRATION; AND COLLEEN PRESTON, EXECUTIVE VICE
                PRESIDENT, PROFESSIONAL SERVICES COUNCIL

                        STATEMENT OF PAUL DENETT

        Mr. Denett. Thank you, Chairman Towns, Ranking Member
    Bilbray, and members of the subcommittee. I appreciate the
    opportunity to appear before you today to discuss recent
    regulatory actions addressing contractor ethics and disclosure
    requirements. You have asked for comments on H.R. 5712, the
    Close the Contractor Fraud Loophole Act. I have prepared
    written remarks that I would like the subcommittee to enter
    into the record, and I would like to briefly summarize those
    comments for you.
        Mr. Towns. Without objection.
        Mr. Denett. Let me begin by assuring the subcommittee that
    the administration is committed to an acquisition process with
    high standards of integrity and effective management controls
    to reduce fraud, waste, and abuse in Government contracting.
        Two recent rulemakings to change the Federal Acquisition
    Regulation reflect unprecedented steps to strengthen contractor
    ethics to protect our taxpayers from fraudulent conduct in the
    award and performance of Federal contracts and subcontracts.
    First, the Civilian Defense Acquisition Regulatory Council's
    finalized FAR changes last November that for the first time
    establish Government-wide requirements for Federal contractors
    to have a written code of business ethics.
        Second, the Council has issued a proposed rule, also last
    November, that would require Government contractors to disclose
    to an agency whenever the contractor has reasonable grounds to
    believe that a violation of criminal law has occurred in
    connection with award or performance of a contract or
    subcontract. The proposed rule would require contractors to
    establish internal control systems and employee training
    programs to ensure compliance.
        You have asked why the rules provide exemptions for
    overseas contracts and commercial item contracts. I understand
    that the exemption for overseas contracts is patterned after
    pre-existing Defense Department regulations dating back to 1988
    that exempted overseas contracts from contract clauses
    requiring hotline posters. These are posters that are placed in
    the contractor workplace with information on how contractor
    employees can report suspected fraud and other misconduct.
        The exemption for commercial item contracts reflects
    provisions in the Federal Acquisitions Streamlining Act that
    require the acquisition of commercial items to resemble
    customary commercial marketplace practices to the maximum
    extent practicable.
        I am inclined to favor the elimination of these exemptions
    for the purposes of these rulemakings. My office asked the
    acquisition law team, which is the team that is responsible for
    drafting ethics rules, to carefully consider whether exemptions
    for overseas contracts and commercial items acquisition are
    necessary.
        In response to this request, the Councils sent OMB a draft
    proposed rule as a followup to the November proposed rule. This
    rule, which OMB received last week, is currently under
    interagency review and will be subject to public notice and
    comment.
        You have asked me to discuss H.R. 5712. This bill would, in
    effect, impose statutory requirements on Federal contractors
    that are similar to the November proposed rule, except that
    H.R. 5712 would also apply these requirements to overseas and
    commercial item contracts. The followup rulemaking and the
    process I just described will ensure that the concerns
    underlying this legislation are appropriately addressed. For
    this reason, I believe the legislation is unnecessary.
        In short, the administration is creating stronger
    Government-wide ethics requirements for government contractors.
    I am confident, when the deliberations are concluded and
    regulatory changes are finalized and fully implemented, we will
    have taken significant steps to have protected the Government
    and taxpayer from fraud in Government contracting.
        This concludes my prepared remarks, and I will be happy to
    answer any questions that you may have.
        [The prepared statement of Mr. Denett follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Towns. Thank you very much, Mr. Denett.
        Now we go to you, Mr. Sabin.

                        STATEMENT OF BARRY SABIN

        Mr. Sabin. Thank you, Chairman Towns, Congressman Welch. I
    appreciate the opportunity to be here today to discuss the
    Close the Contractor Fraud Loophole Act, H.R. 5712, the efforts
    of the Department of Justice to combat fraud in Government
    contracting, and specifically the requirement that Government
    contractors report fraud in material over-billing.
        The Justice Department has a demonstrated and continued
    commitment to a strong and vigorous enforcement effort in the
    important area of procurement fraud. The Department of Justice
    has made the investigation and prosecution of procurement fraud
    a priority, to include procurement fraud related to the wars
    and the building efforts in Iraq and Afghanistan.
        In October 2006 the Justice Department announced a new
    national procurement fraud initiative and the creation of the
    National Procurement Fraud Task Force led by the Justice
    Department's Deputy Attorney General's Office and Criminal
    Division to promote the early detection, prevention, and
    prosecution of procurement and grant fraud associated with
    increasing contracting activity for national security and other
    Government programs.
        The task force has been enthusiastically embraced by the
    entire law enforcement community, including the FBI, the
    Inspector General community, and Defense-related agencies.
    Overall, we now have more effective resource allocation in
    procurement fraud investigations, which has resulted in the
    acceleration of investigations and prosecutions.
        This combined effort of task force members has resulted in
    significant accomplishments, including a number of working
    committees, specialized training, a public Web site, maybe 300
    procurement fraud cases, regional working groups, and more.
        Procurement fraud cases, especially those involving the
    wars in Iraq and Afghanistan, are usually very complex and
    resource intensive. The cases often involve extra-territorial
    conduct, as well as domestic conduct, requiring coordination
    between appropriate law enforcement agencies.
        In order to improve coordination and information sharing,
    we have established a joint operations center based in
    Washington.
        To date, the Justice Department has charged 46 individuals
    or companies for contract fraud relating to the efforts in
    Afghanistan, Kuwait, and Iraq. Last week a KBR fuel technician
    was sentenced to 26 months incarceration in the Eastern
    District of Virginia following his guilty plea to conspiracy to
    defraud and accept bribes in connection with a scheme to divert
    fuel intended for our airfield to the black market in
    Afghanistan.
        Also, last week in the District of Maryland a former senior
    contract fuel manager pled guilty to conspiracy to defraud the
    United States, commit wire fraud, and steal trade secrets.
        With respect to the proposals to require mandatory
    disclosure by contractors, on May 23, 2007, in a letter to the
    Office of Federal Procurement Policy, the Justice Department
    proposed, on behalf of the task force, some modifications to
    the Federal Acquisition Regulation, which would require, among
    other things, that contractors notify the Government whenever
    they become aware of material overpayment or fraud relating to
    the award or performance of contract or subcontract rather than
    wait for the contract overpayment or fraud to be discovered by
    the Government.
        Shortly thereafter, the Councils began the review process,
    and on November 14, 2007, published proposed rules,
    substantially incorporating the task force's requested changes
    of the FAR. The task force's proposal is mild on existing
    requirements found in other areas of corporate compliance.
        In my written statement I will give some of the reasons why
    the changes were requested, including the data evidencing a
    decline in voluntary disclosures to a Department of Defense
    Inspector General.
        The proposed rule, as published by the Councils on November
    14, 2007, added two exemptions, one to Government contracts
    performed entirely overseas and the other for commercial
    contracts that were not included in the original task force's
    proposal submitted on May 23, 2006.
        After the Councils published the proposed rule and sought
    public comment, the task force considered ways to improve the
    proposed rule. In response to what the task force believed were
    some legitimate concerns, we submitted comments on the proposed
    rule on January 14th of this year, addressing the standard for
    the schedule of over-payments and criminal violations,
    cooperation and attorney/client privilege, navigation to
    disclose potential violations of the False Claims Act, the
    grounds for suspension and debarment, the time limit for
    disclosures, and internal investigations by contractors. Law
    enforcement agencies submitted numerous comments to the
    councils in support of the task force's proposal.
        In our January 14th comments we also address the Council's
    decision not to include overseas contracts. We asserted that
    the United States still is a party to these contracts and
    potentially a victim when over-payments are made or when fraud
    occurs in connection with those contracts.
        We noted that, under these circumstances, the Government
    still maintains jurisdiction to prosecute the perpetrators of
    fraud and that these types of contracts, which in many cases
    support our efforts to fight the global war on terror, need
    greater contractor vigilance, because they are performed
    overseas where U.S. Government resources and remedies are more
    limited.
        As the Justice Department has previously stated, the
    Department welcomes the enactment of new tools to combat fraud
    committed by contractors within the criminal jurisdiction of
    the United States. With respect to H.R. 5712, we believe that
    the rulemaking process should be able to address real concerns
    adequately by appropriately incorporating the types of changes
    discussed in our January letter.
        The Justice Department and the task force have taken a
    proactive leadership role in proposing that new ethics rules
    and fraud and overpayment rules be incorporated into the FAR.
    Moreover, the Justice Department will continue its efforts to
    detect, deter, investigate, and prosecute procurement fraud by
    companies and individuals.
        Through these and other efforts, we will ensure that
    taxpayer moneys are protected, our Nation's security defended,
    and the investigation and prosecution of procurement fraud
    remains a Justice Department priority.
        I welcome any questions you may have.
        [The prepared statement of Mr. Sabin follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Towns. Thank you very much, Mr. Sabin.
        You may proceed, Mr. Drabkin. Thank you so much.

                       STATEMENT OF DAVID DRABKIN

        Mr. Drabkin. Chairman Towns, Ranking Member Bilbray,
    members of the subcommittee, thank you for the invitation to
    come and talk to you today about the FAR rulemaking process and
    specifically the ``Federal Acquisition and Regulation Case
    2007-006, Contractor Compliance Program and Integrity
    Reporting.''
        Changes to the FAR undergo a long-established process
    following the direction of the Congress, the President, or
    suggestions from agencies or the public. The proposed changes
    are assigned a case number and are referred to one of the
    standing teams of the FAR Council. These teams are composed of
    career civil servants and uniformed members of the armed
    forces. On occasion, an ad hoc team may be formed to address
    either an unusually complicated matter or a matter that
    requires special attention. Ad hoc teams are also composed of
    career civil servants and uniformed members of the armed forces
    and are drawn from either existing team members or experts
    sought from other agencies.
        Once a case is assigned to a team, the team develops the
    language they believe implements the suggested or directed
    changes based upon their specific expertise and knowledge of
    the procurement process. If they are making the changes based
    on statutory Executive direction, discretion in formulating
    regulatory guidance is limited by the directive they have
    received. If they are making changes based upon suggestions for
    the agencies or the public, their discretion is much broader in
    terms of evaluating the overall consistency of proposed changes
    with existing policies and practices. There is a FAR guide, and
    that guide is available on the Web, and I have placed the Web
    site in my testimony, which I ask, Mr. Chairman, be included in
    the record.
        Mr. Towns. Without objection, so ordered.
        Mr. Drabkin. Once the team completes its assigned work, the
    case is then sent to either the Defense Acquisition Regulatory
    Council [DARC], or the Civilian Agency Acquisition Council
    [CAAC], who reviews the team's work. Once both councils have
    concluded their reviews and made any changes they deem
    appropriate, the case is submitted to the OMB's Office of
    Federal Procurement Policy for review and approval, then to
    OMB's Office of Information and Regulatory Affairs [OIRA], for
    its review, including an interagency coordination at OIRA's
    discretion and approval.
        Then the final rule is sent to the FAR signatories. Those
    would be the Director of Procurement at Defense, the Director
    of Procurement at NASA, and myself at GSA, for their review and
    approval, and then the case is published in the Federal
    Register.
        Currently, over 50 cases are being processed, both
    statutory and non-statutory in origin, and the details and the
    status of all those cases may be found on the Web site set
    forth in my testimony.
        With regard to FAR case 2006-007, it originated from a
    letter from the Department of Homeland Security as a Katrina
    hotline poster case. DHS had been asked by Senators Lieberman
    and Collins to acquire and ensure wide distribution of fraud
    hotline posters in hurricane relief and reconstruction
    contracts. The Senators requested that the regulatory action
    mirror the Department of Defense's contract clause contained in
    the Defense Acquisition Regulatory Supplement [DFARS], that
    requires the prominent display of contract information to
    report fraud, waste, and abuse.
        DOD, GSA, and NASA took the initiative to make the ethics
    coverage in the FARs stronger than DHS or the Senators had
    requested. The original request by DHS was to take the existing
    DOD hotline poster regulation and make it Government-wide. The
    DOD hotline poster clause, which is found at 252.203-7002, was
    required in solicitations of contracts expected to exceed $5
    million, except when performance will take place in a foreign
    country. It also was not required in commercial item contracts.
        The DOD ethics and internal control regulation in the DFARS
    recommended that a contractor system of management controls
    should provide for a timely reporting. This was not mandatory
    on contractors, as there was no clause binding the contractor.
        In FAR case 2006-007, originating from DHS, we issued a
    clause for hotline posters, keeping the overseas and commercial
    items exemptions in that case. The FAR case went further by
    making the ethics aspect mandatory and adding on to the hotline
    poster clause.
        The final rule had two clauses, one for the contractor code
    of business ethics and conduct and another for the display of
    the hotline poster, itself. The introductory paragraph, which
    provides an exception if the contract is for the acquisition of
    commercial items in the part 12 or if it will be performed
    entirely outside the United States applies to both clauses. The
    policy states that all the Government contractors must conduct
    themselves with the highest degree of integrity and honesty and
    should have a written code of business ethics and conduct.
        All contractors should also have an employee business
    ethics and compliance training program and an internal control
    system that is suitable to the size of the company to
    facilitate timely discovery and disclosure of improper conduct
    in connection with Government contracts, and ensure corrective
    measures are promptly instituted and carried out.
        As this FAR case was progressing, the Department of Justice
    submitted a public comment asking that FAR case 2006-007
    provide more detail on the U.S. citizen guidelines. DOJ did not
    comment on the exception for contracts for commercial items or
    contracts performed entirely outside the United States.
        At the same time, DOJ submitted a letter to OFBP setting
    out DOJ's request to open a new FAR case. DOJ requested changes
    to the FAR to require contractors to establish and maintain
    internal controls to detect and prevent fraud in their contract
    and notify contracting officers without delay whenever they
    become aware of the contract overpayment or fraud, rather than
    wait for the discovery by the Government.
        The emphasis of the DOJ letter and the focus of the DOD and
    GSA and NASA was on mandatory disclosure rather than on the
    exemptions. The DOJ request provided that commercial
    contractors may be excluded from the compliance program
    requirements. DOJ asked for and received a commitment from OFBP
    to publish a new proposed rule on an expedited basis. The FAR
    Council complied with this request by expediting the drafting,
    finishing, and approving of a proposed rule.
        The new 2007-006, and this can by very confusing, because
    the other rule is 2006-007, but the new rule, 2007-006 proposed
    rule did not totally exempt overseas contracts. The proposed
    rule applied the new debarment and suspension clauses to the
    overseas contracts. A contractor may be debarred or suspended
    for knowing failure to timely disclose an overpayment on a
    Government contract or violations of Federal criminal law in
    connection with the award and performance of the Government
    contract or subcontract, which includes violations of any
    contract, whether domestic or overseas.
        The law team has modified the proposed rule and will
    publish it for public comment and review. Comments received
    will be considered in drafting the final rule.
        Mr. Chairman, Ranking Member Bilbray, the FAR rulemaking
    process is one of the unheralded great success stories in the
    Federal Government's procurement practices. It has kept parties
    and politics out of the business function of Government for
    decades. I hope that you will join me in congratulating the
    hundreds of career civil servants and uniformed military
    members who have, over the years, honed this process and made
    it work for the American taxpayers and the Federal Government.
    These individuals are truly the unsung heroes of Government.
        Our colleagues in government all over the world study our
    system with envy and try to emulate it within their own
    customers and cultures, as allowed.
        I would be happy to answer any questions you may have.
        [The prepared statement of Mr. Drabkin follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Towns. Thank you very much, Mr. Drabkin.
        Ms. Preston.

                      STATEMENT OF COLLEEN PRESTON

        Ms. Preston. Thank you very much, Mr. Chairman and
    Congressman Welch. Thank you for the invitation to testify
    today on behalf of the Professional Services Council.
        PSC is the national trade association of the Government
    services industry. This year PSC and the Contract Services
    Association of America merged to form a single unified voice
    representing the full range and diversity of the Government
    services sector. We now represent over 340 member companies
    with hundreds of thousands of employees in over 50 States.
        We support the efforts of this committee, the Department of
    Justice's National Procurement Fraud Initiative, the various
    agencies, and the Office of Federal Procurement Policy in their
    efforts to ensure that the Government is protected against
    fraudulent behavior by contractors whether in the United States
    or abroad, whether commercial suppliers or Government-only
    contractors.
        We all share the goal of reducing unethical behavior. The
    question is how best do you do that.
        Often what sounds like a simple and sensible proposal, when
    applied in the context of the realities of the contracting
    process, can end up having significant unintended consequences
    and costs far beyond its benefits. We believe that is the case
    with H.R. 5712, and we oppose it in its present form.
        Before going further, I would just like to point out that
    the Government is currently protected against fraudulent
    behavior by any number of criminal statutes, the False Claims
    Act, by contract penalties that may be imposed, and by the
    suspension and debarment process. These protections apply,
    whether or not a company is providing a commercial item or
    whether the contract is being performed domestically or
    overseas.
        Our objections to the proposed legislation are based on the
    following key factors: First, there is no reason to believe
    that a mandatory reporting requirement will actually result in
    reduced fraud or additional opportunities for redress by the
    Government. Indeed, history suggests strongly that voluntary
    programs properly structured and supported are more effective
    tools.
        Second, we believe that the voluntary disclosure programs
    that are in existence now are actually a lot more effective
    than DOJ claims. The data shows that, while the specific DOD
    voluntary disclosure program has been experiencing a downturn,
    there are other equally important DOJ programs that are
    experiencing an increase in voluntary disclosures. They are
    projecting the exact opposite trend.
        Additionally, there are substantial improvements that could
    be made in the DOD voluntary disclosure program that we believe
    would strengthen it without requiring mandatory reporting for
    every error that may be then subject to the criminal
    investigation.
        We also believe that contractors are making many, many
    voluntary disclosures outside of the formal program, and we
    think it would be better served if the Department of Justice
    and others would explore why that is occurring outside of the
    current formal program and if that is a problem if they are
    occurring.
        Third, the exemption from reporting for work performed
    outside the United States was not added, as you have heard
    today, at the last second, and in no way changes a company's
    obligations to adhere to U.S. anti-fraud laws and regulations.
    What we are talking about in H.R. 5712 is a procedural
    requirement. These are procedural requirements that are often
    imposed on Government contractors in the United States that our
    companies understand. That is not the same when you are dealing
    with foreign companies who do not operate under the same terms
    and conditions that U.S. companies do.
        Fourth, even the Department of Justice in its comments on
    the proposed Federal acquisition regulation that this
    legislation seeks to modify acknowledged that the proposed
    threshold for mandatory reporting, a reasonable grounds to
    believe, was too vague and would open the door to potential
    landslide of unnecessary reports, which have little or no
    relationship to actually fraud.
        As they have also acknowledged, it is both unnecessary and
    inappropriate to apply this to commercial contracts. The idea
    of getting commercial items is that the Government would buy
    under the same terms and conditions in the commercial
    marketplace that every other vendor does. If you go out to buy
    a computer, for example, you don't dictate to the company what
    the terms and conditions are of the sale that they are giving
    to you. In the same regard, if the Government wants access to
    the best technology in the world in the commercial sector and
    commercial services, there are many instances where companies
    will not abide with agreeing to unique, Government-only terms
    and conditions.
        Six, the proposed legislation would place prime contractors
    in an untenable position. The vagaries of the mandatory
    reporting threshold places them at great risk, since it
    requires them to have a degree of insight, and inside knowledge
    about the business processes of their subcontractors. Might I
    add that the legislation provides no threshold for reporting at
    the subcontract level. We believe the better approach would be
    to mandate that the Department of Justice enter into
    discussions with contractors to ascertain why the DOD voluntary
    disclosure program isn't operating as effectively as they
    believe it should and to require an assessment of the totality
    of voluntary disclosures that contractors are making before
    making any further changes.
        We support the continued emphasis on education and training
    rather than penalties to foster that internal self-governance
    in companies that will encourage employees to come forward to
    seek advice, and then if they find that there have been errors
    or problems or infractions to then come forward and report
    them.
        We strongly encourage companies to do this and we are happy
    to work with the committee and the Department of Justice to
    assist in developing processes that will further the goal of
    enhancing ethical contractor behavior.
        Thank you. I appreciate the opportunity to testify. I look
    forward to your questions.
        [The prepared statement of Ms. Preston follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Towns. Thank you very much. I thank all of you for your
    testimony.
        Let me begin with you, Ms. Preston. So you are saying that
    H.R. 5712 is not necessary?
        Ms. Preston. We are saying that we believe that better
    approach is--yes, the short answer would be that it is
    unnecessary. We believe that through the regulatory process we
    have had the opportunity to explain a lot of the concerns that
    have come about as a result of the Department of Justice's
    proposal, and that, if you look at the behavior of companies
    and employees in those companies, you are much more likely to
    get not only reporting if there is unethical behavior, but also
    cures to make sure that act or problem doesn't occur again if
    you have a voluntary program.
        Mr. Towns. Mr. Sabin, what do you say to that?
        Mr. Sabin. With respect to the legislation?
        Mr. Towns. Yes.
        Mr. Sabin. The Department of Justice and the task force
    proceeded through the regulatory route. We thought that would
    be an appropriate means and an appropriate mechanism for
    addressing the concerns. We wanted to instill strong ethics,
    business corporate compliance, and the like, and we felt that
    working through the interagency process, that the regulatory
    mechanism, as articulated by Mr. Denett, is an appropriate
    vehicle by which to do that.
        In terms of the legislation proposed by Congressman Welch
    in recent days, we don't have a formal Department of Justice
    views letter or position with respect to that piece of
    legislation. So, our initial preference is to proceed through
    the regulatory mechanism before going through the legislative
    process.
        Looking at the actual bill, we would be happy to sit down
    with staff, with you, but we can, at least on initial
    observation, see some deficiencies, both technical,
    definitional, and the like, to work through if the legislation
    proceeds. But, I don't come before you today with a Department
    of Justice views based upon the recency of the proposed
    legislation.
        Mr. Towns. All right. Mr. Denett, don't you think that
    something needs to be done? I mean, I think it was Mr. Sabin
    who talked about 46 cases. And let me just say to you that I
    know there are a lot of others. So, don't you think we need to
    do something?
        Mr. Sabin. Well, Congressman, we are doing something. The
    things that we have out now are unprecedented. We are advancing
    the ethical behavior with contractors more than has ever been
    done, so we are pleased by that. We are requiring them to have
    ethics training, internal reporting mechanisms. We are
    requiring them to inform us when they have done criminal
    activity. So to me this is major initiatives that have gone
    forth in the last several months.
        The fact that we are now giving serious thought to getting
    rid of the exemption for overseas and commercial, that is a
    significant change from what we proposed a short while ago.
        So in order for us to fully vet that and get comments from
    everyone--the American Bar, various companies, associations--we
    think that they are owed the opportunity, since that is in the
    works, to have a chance to vet their views so that we know
    everybody's view on this before a final decision is made. I
    think to legislate without that input is not a wise choice.
        Mr. Towns. Well, you know, let me just go back to you
    again, Ms. Preston, because you are saying that voluntary is
    fine, voluntary disclosure. You say that is fine, voluntary?
        Ms. Preston. Yes, Mr. Chairman.
        Mr. Towns. Right, and, Mr. Sabin, you are saying mandatory
    is what we need?
        Mr. Sabin. We believe that in this context, in the
    procurement fraud context, it has not been working. The data
    does not reflect that voluntary disclosures to, for example,
    the Department of Defense Inspector General has declined,
    especially in recent years. Indeed, we are not aware, over the
    past 2 years, of any disclosures, voluntary disclosures, from
    the top 15 contractors relating to fraud and material over-
    billing.
        So in that realm, with the increased spending that is
    occurring in national security and the like, we believe that
    and our recommendations were to have a mandatory disclosure
    obligation.
        Some of the voluntary disclosure programs that are
    referenced either in Ms. Preston's written statement or in her
    remarks this morning, we believe are sort of misplaced with
    respect to the application in this reign. For example, the
    antitrust program that is referenced in her statement in the
    Department of Justice that provides amnesty is one in which it
    is for the company reporting about other companies, as opposed
    to the particular company that is disclosing, which would be in
    the procurement fraud context about either conduct that occurs
    within that corporate structure. So, to apply other voluntary
    disclosure programs, which can work in other contexts, to this
    one we believe is misplaced.
        Ms. Preston. Mr. Chairman, as Mr. Sabin said, there are
    other programs that have worked very well and are working, and
    the reporting under those voluntary programs is increasing.
        If I understand what he is saying is basically that because
    they haven't had a voluntary report from the top 15
    contractors, there is an assumption that there is fraud that
    has been unreported. Most of those companies belong to and are
    probably signatories to the Defense Ethics Initiative and other
    things. They have instituted strong, strong ethics programs
    with reporting.
        Many of the reasons that people do not report, as we are
    told, under the DOD voluntary disclosure program is that once
    they do, it becomes a criminal process that takes up to two to
    3 years to resolve. Most of the times, the companies will
    report to a contracting officer if there is not fraudulent
    conduct. And, it turns out that if it can be handled through an
    administrative process, they will do it that way, and that is
    much preferable to them to be able to resolve the situation, to
    punish the employee, to figure out why it happened in the first
    place, and to work out a system with the Government so that
    they can improve the program that they do have and make sure it
    doesn't happen again.
        So, I think to say that just because they haven't had a
    report from 15 companies doesn't mean that the program is not
    working. All we are asking is, sit down with us, figure out why
    the program isn't working. Let's see if we can make it work by
    getting rid of some of the impediments that are causing people
    not to report under it.
        Mr. Towns. My time has expired, so I yield now to
    Congressman Bilbray.
        Mr. Bilbray. Justice Department, I assume, has made some
    suggestions on some numbers changes in the rulemaking, right?
        Mr. Sabin. Yes, we have.
        Mr. Bilbray. Including the suspension language. Do you
    intend to add any other language or have any other
    recommendations specifically to the rulemaking?
        Mr. Sabin. We had on January 14th provided a number of
    detailed recommendations and suggested language with respect to
    2007-006. To the extent that, as Mr. Denett indicated,
    additional materials would be circulated, either in interagency
    process or published for additional comment, we would actively
    engage in that to ensure that the task force's views and the
    Justice Department's views are provided.
        Mr. Bilbray. Are you comfortable with how FAR has vetted
    this with stakeholders such as Ms. Preston?
        Mr. Sabin. Yes. I believe the notice and comment period
    provided for extensive opportunity for specifics to be
    addressed, that there were a number received by both Inspector
    Generals, law enforcement community, as well as law firms and
    others in private industry, and we have had dialog with a
    number of those to ensure that we are trying to be surgical,
    reasonable, and thoughtful in how to establish what, I think,
    we all share common ground on, which is a rigorous business and
    ethics compliance code.
        Mr. Bilbray. With the progress we have made on the
    rulemaking, do you think this legislation is essentially needed
    or advisable?
        Mr. Sabin. Our position has been that in the first instance
    the rulemaking should proceed forward rather than the
    legislative this year.
        Mr. Bilbray. Your point is the rulemaking should move
    forward and then, we will see what we should do with
    legislation?
        Mr. Sabin. That is where we are. We do not have further
    Justice Department views on the particular legislation.
        Mr. Bilbray. OK. Thank you, Mr. Chairman. I yield back. Can
    I yield to the chairman, please?
        Mr. Davis of Virginia. Closing loopholes always sounds
    good, but when the loophole just turns out to be an exemption
    inadvertently transported into a proposed rulemaking, this bill
    applies a blunt instrument process to a process that requires
    delicate surgery.
        This bill provides that a known failure to report
    violations is a criminal law when it is related to a Federal
    contract. It would be a cause of debarment or suspension for
    all concerned, including those holding contracts performed
    overseas or contracts for commercial items.
        That is exactly the coverage currently contained in much
    more lengthy proposed regulation. What's all the fuss about?
    The proposed rule does include an exemption for overseas and
    commercial contracts, but the exemption applies only to the
    establishment of internal ethics and programs and control
    systems.
        The enforcement of debarment and suspension for failure to
    report would apply to all contractors, even without this bill.
    While it may or may not be good policy to apply all or some of
    the internal programs to overseas or commercial contractors,
    the frenzy accompanying the bill hardly seems justified.
        This does not make a significant change to the substance of
    the proposed rule, but it does leap from the statutorily
    designated process for writing acquisition regulations and in
    statute a novel reporting scheme yet to be completely vetted.
        The concept of mandatory reporting by contractors of
    possible criminal violations based on reasonable grounds is
    unprecedented and controversial. The rule is the subject of
    more than 70 comments, and only two of those commentators are
    present today. We expected many of the firms subject to the
    rule to express serious concerns. They argue a company could
    well face the loss of the ability to do business with the
    Government based on highly technical interpretations of what
    constitutes a criminal law violation.
        I admit that debarment and suspension are to protect the
    Government, not to punish companies. That has always been the
    underlying policy. None of the witnesses today, including the
    Department of Justice, support this bill, and they urge
    justifiable statutorily mandated regulatory process to take its
    course.
        We understand the new proposed rules to be issued any day
    now, which will, among other things, correct the exemptions and
    internal ethics awareness and control programs and call for
    another round of comments.
        In stark contrast to open and very deliberate and open
    process, today is the first and the only hearing on this bill.
    Tomorrow at 9:30 a.m. members of the full committee will be
    asked to consider and approve this proposal, which appears
    designed to close more political holes than legal ones.
        Thank you. Thank you, Mr. Chairman.
        [The prepared statement of Hon. Tom Davis follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Towns. Thank you.
        On that note I yield to the author of the bill, Mr. Welch.
        Mr. Welch. Thank you, Mr. Chairman. There are really two
    very simple questions. One, how is it that the original rule
    was proposed that would require reporting for domestic
    contracts but not for foreign contracts? And then the second is
    the need for the statutory protection to give the benefit of
    protection to the taxpayer.
        Mr. Denett, I am going to ask you a little bit about this.
    The original rule that was proposed had a requirement for fraud
    reporting if it was a domestic contract, correct?
        Mr. Denett. Yes.
        Mr. Welch. And it did not include a requirement for
    reporting if that taxpayer dollar was spent abroad, correct?
        Mr. Denett. Well, the work group of career people that
    worked on it, when they looked at the fact that Defense
    Department had exempted overseas for earlier requirements, such
    as these posters, they decided not to include overseas in it.
        Mr. Welch. OK. Let me ask you this: in your mind, does a
    taxpayer dollar spent abroad deserve any less protection from
    waste, fraud, or mismanagement than a taxpayer dollar that is
    spent here in the United States?
        Mr. Denett. Well, as I stated in my opening remarks, I am
    inclined to remove the exemption, but I am not comfortable----
        Mr. Welch. I'm asking a simple question: does the taxpayer
    dollar abroad deserve the same degree of protection as a
    taxpayer dollar spent here at home?
        Mr. Denett. All our tax dollars, regardless of location----
        Mr. Welch. All right. We all agree on that, I take it. All
    right? So isn't it your job, among other things, at OMB to take
    appropriate action, including rulemaking, to protect all
    taxpayer dollars, regardless of where those taxpayer dollars
    are being spent?
        Mr. Denett. That is, in fact, what we are doing.
        Mr. Welch. And now, you have proposed this rule, and you
    are now suggesting that you want to amend it so that it does
    incorporate suggestions that were made to you by the Department
    of Justice to include foreign contracts, correct?
        Mr. Denett. That is correct.
        Mr. Welch. All right. I want to know, if you can explain
    it, how it is in this rulemaking process where you sent out for
    comment the rule that had this exception for foreign
    contracts--you sent it to Homeland Security, the SBA, the
    Department of Labor, Veterans Affairs, Defense, Housing and
    Urban Development, Transportation, Agriculture, Health and
    Human Services, State, Interior, Treasury, and so on, 18
    different agencies. None of them comment, with the exception of
    Justice, about the oversight of leaving outside the protection
    of taxpayer dollars that were spent abroad?
        Mr. Denett. That is what I am told.
        Mr. Welch. All right. We have, thanks to documents that
    have been provided, a couple of e-mails that were sent out
    probably to 50 to 80 people who had an opportunity to comment,
    and with the exception of one comment from the Social Security
    Administration, nobody in this extensive process that you go
    through flagged this failure to include subject to the rule
    foreign contracts?
        Mr. Denett. That is correct. The focus was on creating
    ethics standards for the first time ever, requiring mandatory--
    --
        Mr. Welch. Wait a minute. The focus is on protecting
    taxpayer dollars. How did we get from here to there? You did
    have a comment from the Social Security Administration, of all
    places, that stated very explicitly under this proposed rule
    contracts performed by a U.S. company on foreign soil would be
    exempt. Did you respond to that comment by the Social Security
    Administration?
        Mr. Denett. I did not. I don't know if GSA, who had members
    on there----
        Mr. Welch. So the answer is no. Why did you take the advice
    offered by the Department of Justice?
        Mr. Denett. As I said earlier, our focus was on making
    major improvements, which in fact we did. This group of career
    civil servants that labored over this for many weeks put forth
    to us something that did not include overseas contracting.
        Mr. Welch. Mr. Drabkin, what about the GSA? We went through
    this extensive process, e-mails and comments from people all
    across Government, and no one, with the exception of somebody
    from Social Security Administration, flagged this separation
    between domestic and foreign?
        Mr. Drabkin. Yes, sir. What happened at the CAAC meeting
    when the rule was discussed, a Social Security representative--
    and I was informed of this today, not when I spoke with your
    staff members on Friday--but the Social Security member to the
    CAAC did raise the issue. There was a brief discussion, and
    that same member withdrew the issue and the rule went forward.
    At the time----
        Mr. Welch. This is the first----
        Mr. Drabkin. If I may, Mr. Welch----
        Mr. Welch. No. You have answered it.
        Mr. Drabkin. No, sir, I haven't.
        Mr. Welch. You actually haven't is right, but do you
    support change in the rule so that it includes foreign
    contracts as well as domestic contracts?
        Mr. Drabkin. Sir, I support the process, and the process we
    are going through now, and I support taking public comments.
    Since I am one of three people that get to vote on the rule and
    sign it, it would be inappropriate for me in advance of that
    process being complete to tell you where I sit, although Mr.
    Denett has made it clear to us what the administration's policy
    is, and we generally follow the administration's policy at this
    point.
        Mr. Welch. Fair enough. Thank you.
        Ms. Preston, you represent the Professional Services
    Council. It is over 300 contractors.
        Ms. Preston. Yes, sir.
        Mr. Welch. And your boss, I think, was on record as saying
    that they do not want this rule; is that correct?
        Ms. Preston. Yes, sir, that is correct.
        Mr. Welch. I listened to your testimony, and, frankly, I
    think we are talking about, in some respects, two different
    things. This rule and this legislation does not require any of
    your member companies to become private Inspector Generals.
    This requires them to report when they have knowledge about
    waste, fraud, or abuse. I mean, what are you so afraid of if,
    let's say, Bechtel and the $150 million that went to $160
    million and $169 million contract in building the Basrah
    Children's Hospital, if they become aware of fraud why wouldn't
    we have an expectation, on behalf of the taxpayers, that they
    would report that?
        Ms. Preston. The reason that there is concern is because of
    the standard and creating a standard for when it is. That----
        Mr. Welch. I hate to interrupt, but I don't have much time.
    That goes to the terms and conditions and perhaps the language
    of the statute or the rule, but why would any of your
    contracting entities that you work for--Blackwater, Triple
    Canopy, KBR--companies that have received billions of dollars
    in taxpayer dollars, why would they have any reservation about
    sharing with the Government knowledge that they have when they
    have it that taxpayers are being ripped off?
        Ms. Preston. There isn't any question that they would share
    that information if they knew it. The question is: how is it
    drafted in terms of particularly the legislation, and what are
    the risks that they incur? So they----
        Mr. Welch. So you don't want any statutory either
    rulemaking obligation. You want them to have voluntary capacity
    to do this, so when in doubt they make the final decision?
        Ms. Preston. Because if they voluntarily can report, then
    they will report when they understand something. It is the
    practicalities of what happens. So if you are the contractor--
    and many of these contracts, as you said, are over in Iraq--you
    are the contractor who has five levels of subcontractors. The
    subcontractor that is doing the plumbing on that building, they
    probably----
        Mr. Welch. Or not doing the plumbing on that building.
        Ms. Preston. The prime contractor is not in privity of
    contract with that subcontractor and may not have----
        Mr. Welch. I don't have much time, so----
        Ms. Preston. Say one of those employees----
        Mr. Welch. I yield the balance of my time. I'm sorry.
        Ms. Preston. Say one of those employees overhears one of
    the Iraqi nationals saying to a friend, I just got someone to
    work for me at $10 an hour and I was able to charge the
    Government or charge my prime contractor $15 an hour. An
    employee of the prime contractor hears that. Does he then
    immediately report that as being a case of fraud? He doesn't
    know if the person was bluffing. He doesn't know whether or not
    there has been a violation of law. He doesn't know if that is
    unethical behavior. He doesn't really know what happened.
        The concern is that if he doesn't immediately report it and
    it later turns out to be some type of fraudulent or unethical
    behavior, that company could be debarred, the whole company,
    for something that someone overheard in a conversation out on
    the----
        Mr. Welch. Mr. Sabin, would you debar that company?
        Mr. Sabin. It would look to the specific facts and
    circumstances relating to the matter. We have limited
    resources, and we would use our enforcement and investigative
    resources appropriately. I think we could have common ground at
    what could be appropriate standards and manners in which
    disclosures could be made subject to internal investigation by
    the company to root out the particular facts so that
    expeditiously the referral was made in a thoughtful and proper
    manner.
        Mr. Welch. Thank you.
        Thank you, Mr. Chairman.
        Mr. Towns. I now yield to the gentleman from Virginia, Mr.
    Davis.
        Mr. Davis of Virginia. We seem to have different
    philosophies here. My philosophy in Government contracting is:
    you want to get the best deal for the taxpayer, and to do that,
    you want as many bidders in the process or as many companies
    and ideas coming in as possible.
        What I hear coming from some other Members is, we want to
    reduce this. We want to debar people. We want to put up
    restrictions so you have fewer people, and that means less
    competition, which at the end of the day means we end up paying
    more and getting less.
        Ms. Preston, you have a long record in this, going back to
    when I was a Government contracts attorney back in the 1980's.
    You remember the procurement integrity certifications and
    everything that came out. You note that many commercial
    companies would be unwilling to accept the risk level that is
    levied upon them by the mandatory self-reporting requirements
    in this bill. Do you think the self-reporting regime will cause
    such companies to walk away from the Federal market, or parts
    of it?
        Ms. Preston. I do believe that there are many companies now
    who sell commercial products to the Government who are very
    concerned that----
        Mr. Davis of Virginia. The downside is raised so much.
        Ms. Preston. That the costs of doing business with the
    Government are increasing, and every single provision that gets
    added on, there will come a time when there is the straw that
    breaks the camel's back.
        Mr. Davis of Virginia. Is there a high cost of compliance
    with the proposed self-reporting regime, and is this high cost
    or is this a very marginal cost for a company as you look at
    it?
        Ms. Preston. No. I believe that when you put on the threat
    of debarment, suspension in the way this legislation is
    drafted, that it will cause companies to increase dramatically
    some of the costs of doing business, but it is the risk that is
    the biggest factor. It is the unknown that really causes people
    concern.
        Mr. Davis of Virginia. We did a hearing a couple of years
    ago that noted some of the largest companies in America still
    refuse to do business with the Federal Government. They will
    work through intermediaries, re-sellers, and the like, but they
    are very nervous for a number of reasons. Some of it is the
    liability, some was protection of IP, some of it is separate
    accounting systems. We tried through time to try to attract
    these companies--many of them are very large--into the Federal
    marketplace so we can get better deals for taxpayers instead of
    having to go through re-sellers.
        But this is just another, it seems to me, lower of the
    unintended consequence of trying to protect consumers. In point
    of fact, it may drive away competitors.
        Ms. Preston. Exactly. We believe that it will. We believe
    that the voluntary process works well. It is an incentive to
    companies. Companies have tremendous incentives to report. One
    is if they do they avoid the potential of a suit. They get
    leniency under the U.S. sentencing guidelines. That has been a
    dramatic factor in incentivizing companies to voluntarily
    report.
        We think that process is working well and allows them to
    operate within the context of the ethics programs that they
    have established within their companies.
        Mr. Davis of Virginia. Mr. Drabkin, let me ask, do you have
    any reason or any evidence that the alleged loophole for the
    contracts performed overseas or for commercial items was
    nefariously slipped in the proposed rule at the 11th hour to
    try to give contractors a free ride to defraud taxpayers?
        Mr. Drabkin. No, sir. Quite frankly, I am offended that the
    suggestion was made without a scintilla of evidence that
    suggested that was the case. In fact, for many months prior to
    this hearing there have been suggestions floating around that
    somehow someone influenced one of these career civil servants
    to put that in. That is absolutely not true.
        The truth of the matter is they made a drafting error. They
    copied and cut and pasted language from 2006-007. They put it
    into 2007-006. They didn't give any great thought to whether or
    not the exemption made sense or not. They were in a hurry and
    they processed a rule. Quite frankly, sir, the suggestion that
    has been made by some folks around town that these folks did
    wrong is just horrible. It is an offense.
        Mr. Davis of Virginia. In point of fact, in procurement in
    general, whether it is contract managers, procurement
    officials, we are having a hard time recruiting good people
    into this business, aren't we?
        Mr. Drabkin. Sir, we are not meeting what anybody calls a
    recruitment goal. We are barely staying even. We add additional
    requirements each day to what a contracting officer does, and
    then we impugn their honor and their integrity without a
    scintilla of evidence, not a single bit of evidence. Why would
    they do this? Ask yourself why would they sign up to do this.
    You don't pay them any extra. They're not the ones that get to
    go and travel. They are not the ones that get to go to big,
    giant institutions for education. They work 60 to 80 hours a
    week to get the job done. They don't ask for overtime, and we
    impugn their honor and integrity because we--well, I had better
    stop.
        Mr. Davis of Virginia. I represent 5,400 Federal employees
    and a number of contractors, as well, and most of them are very
    hard working and try to do their job, and once in a while you
    make a mistake, as we do, I might add, up here. We make a lot
    of them. Hence, we have a $9 trillion deficit.
        Thank you very much.
        Mr. Towns. Thank you very much.
        At this time I will go a second round.
        Ms. Preston, what do you feel could be done to fix this
    legislation? What do you feel, or is it a fact that you just
    feel that we should not be involved in the process at all?
        Ms. Preston. Well, I don't believe the legislation is
    necessary at this time. I think the regulatory process is
    working well. We have concerns about the regulations the way
    they have been drafted, and particularly the new exclusions. We
    will get the opportunity to comment on those, as well.
        But, certainly we think that, at least in the regulatory
    process, you have an opportunity to have every voice heard and
    to explore further the particular impact of changes that we
    don't necessarily get in the legislative process.
        Mr. Towns. Right. You know, it is interesting, though, that
    most people just oppose legislation, period. Sarbanes-Oxley, I
    will never forget in terms of people coming up and opposing it
    and opposing it and opposing it, and at the same time they were
    saying there were some problems. So if we have some problems,
    how do we fix the problems?
        Now, I think with Mr. Sabin, who indicated that those 46
    cases--anyway, I think, going back to the money, I think there
    was $102 billion we spent over the last 5 years to help rebuild
    Iraq and Afghanistan, and, of course, they cover at least $14
    million in contract bribes. Well, even with this structure we
    are finding bribes. So, I think that there are some serious
    problems, and I think that we cannot sit back and just sort of
    ignore the problem. I think something needs to be done.
        Now, if H.R. 5712 is not the answer, then I think we should
    talk about what needs to be done, but to say that legislation
    is not necessary, I can't quite accept that. I think that it is
    too serious to just sort of pass off the fact that making a
    decision to volunteer the information they give to you. I don't
    think that we can really move forward with that in mind, with
    the fact that the kind of money that is being spent and
    knowing--and everybody sitting at that table knows there are
    some problems. Nobody said there are no problems.
        Ms. Preston. And, Mr. Chairman, we certainly do not
    advocate any of the activity that is going on that is unethical
    in any form whatsoever. The fact that it is being found and
    prosecuted is, I think, a good news story that people are
    finding out about what is happening and prosecuting those
    people who have acted unethically. That should definitely
    happen.
        What we are talking about here is not whether or not people
    will be prosecuted for fraudulent behavior; it is a question of
    a reporting mechanism to--what people believe is the tool to
    make sure that we do, in fact, find out about whether or not
    there is fraud. That is the issue. It is not whether or not
    people are being prosecuted or not; it is how you get there.
        We are saying that you are more likely to get companies to
    self-report if you don't hit them with punishment and other
    things in addition to the penalties that already are associated
    with whatever activity occurred. That is the only question is
    how you get there.
        Mr. Towns. Well, I think that we need to help them get
    there, and I think that H.R. 5712 sort of helps them to get
    there.
        You know, I think that we need to do something, and if this
    is not the answer I want to hear something from you other than,
    ``continue to trust them.'' That is what I really say, because,
    you know, we are spending a lot of money. That is $102 billion.
    That is B as in Boy. That is a lot of money.
        Ms. Preston. I certainly agree, Mr. Chairman, and I am not
    asking to trust them. I am pointing out that there are
    incentives already in place that are much more powerful than a
    mandatory reporting requirement, which has many pitfalls
    associated with it; that there are so many more incentives that
    would cause a company to report a violation if they found one.
        If you are knowingly violating the law, you are not likely
    to self-report. The chances are if somebody is embezzling in
    one of your companies, they are not going to tell anybody else.
    They are not going to self-report. They are not going to report
    themselves. If someone else finds out about it, they are much
    more likely to report it in a system where they know the
    company won't be punished in a way that hits them instead of
    the offending person.
        If it is your colleague next door and you find out that
    they are embezzling, you want that colleague punished. You want
    them thrown out of the company. You want them prosecuted, but
    you don't want yourself and the rest of your fellow colleagues
    hurt, like you would be if you were debarred or suspended.
        Mr. Towns. Let me say that it does not appear to me that
    the Federal contractors are being asked to do anything that is
    not already expected for their counterparts in other
    industries. To me, it doesn't appear to be any different. I
    guess I need to yield to the author of it, but it seemed to me
    that when I look at Sarbanes-Oxley and others, you know that we
    are asking the same thing really. I don't understand the
    resistance here.
        Yes, sir, Mr. Sabin?
        Mr. Sabin. I think Ms. Preston's points--we share some
    common ground there with respect to the desire that sentencing
    guidelines provide a foundation by which risk is taken out of
    the equation for corporations in terms of their reporting. I
    think we share common ground that we want to increase
    incentives so that corporate individuals, both employees and
    management, understand the consequences and understand the
    process. Process is important, as well as substance. So we get
    to, as she indicated, the mechanism by which that can occur so
    that we can achieve, both in terms of corporate culture as well
    as other appropriate goals and objectives, including law
    enforcement, that goal.
        I think the flaw in her analysis is that the present system
    is working in terms of that kind of information flowing either
    to the contracting officer or to the Inspectors General,
    because the indication that was received when we looked at this
    matter through our interagency process is that those referrals
    were not coming, even though there has been an extraordinary
    increase in terms of Government spending, and that the idea is
    that there needs to be thoughtful prosecutional discretion that
    it not linger in terms of the investigation or the prosecution,
    that we make real-time decisions, but that the referrals and
    that information could assist the Government in greater means
    of addressing a problem we believe exists, and that we believe
    that additional enforcement efforts, as appropriate--there may
    be declinations. There may be matters that are inappropriate
    for Federal prosecution.
        Again, we are not seeking to go very wide in that. It has
    to be fraud in connection with the contract or subcontract. It
    has to be material over-billing, not just routine contract
    administration. So, our objective is to make sure that those
    enforcement efforts are thoughtful and productive so that there
    is a culture, both in the corporate community as well as in
    their interaction between private and public sector.
        Mr. Towns. I yield to Congressman Bilbray.
        Mr. Bilbray. Thank you.
        As followup on that, doesn't the DOD contractors have the
    ability to go to the Defense Contractor Management Agencies,
    the Inspector General for the DOD? Now, does the Inspector
    General report to these other agencies so that they can be
    informed that reports have shown up there?
        Mr. Sabin. If I understand the question, there is a
    referral process from DOD IG to prosecutorial enforcement, as
    well as an interagency process so that we are vetting so that
    there isn't overlap between what DOD is doing and another
    Inspector General. So there is, as they say in Washington,
    deconfliction occurring with respect to the investigative
    matter.
        Mr. Bilbray. The fact that DOD has this different system,
    is it possible that those reports are going over there and not
    double backing, not being reported?
        Mr. Sabin. The information that we received in the task
    force is that those referrals are not occurring, whether in DOD
    or elsewhere.
        Mr. Bilbray. OK. Now, you deferred to the FAR. Why do you
    defer to the FAR?
        Mr. Sabin. On certain matters they certainly have the
    expertise and the Justice Department doesn't profess to be
    experts in all nuances of Government contracting. All they are
    primarily is the enforcement. But our task force members, many
    of whom are steeped in the specifics, recommended that this was
    an appropriate vehicle by which to address a problem that
    needed addressing.
        Mr. Bilbray. Now, the FAR sort of indicated that this was
    sort of a clerical error that had created a loophole here?
        Mr. Drabkin. The exception language was a drafting error,
    and we now have a draft proposed rule without that language in
    it for the comment process. I didn't get a chance to explain it
    fully, but we can't add new requirements to a rule after we
    have gone out for public comment without going out for public
    comment again, and so we have to go back through the proposed
    process. And actually, we have more in this proposed rule than
    is in Mr. Welch's legislation, including some additional
    recommendations from the Department of Justice, which have been
    incorporated in the proposed rule and is currently being
    cleared within the Government. But, we have provided copies to
    members of your staff so you can see what is in there.
        Mr. Bilbray. So Mr. Welch's legislation is actually
    addressing a concern you have; it is just that you are saying
    we created the problem with a clerical error, we are now going
    through the process, as mandated by Federal law, to not only
    address this but to address other related items or more
    extensive coverage within the system where the problem
    originally occurred, rather than doing it through the
    legislative process?
        Mr. Drabkin. I want to be clear, because I don't want there
    to be any mistake. We did not knowingly, thinkingly, put in the
    exception.
        Mr. Bilbray. OK.
        Mr. Drabkin. We have taken that exception out in the
    proposed rule. Even though it was mentioned by the Social
    Security Administration person at the CAAC meeting, it got no
    real thought. It wasn't examined. It was never raised, and it
    never went any further.
        We understand as a result of the comment process, which
    Congress told us to use when it set up the procurement
    rulemaking process in title 41--we have gone through that
    process. It has worked. It has identified this issue and a
    number of others, which are really important to making this
    work and work well.
        I think it is fair to say there is not a member of the FAR
    Council that is not concerned with procurement fraud, with
    people stealing from the Government or the taxpayers,
    particularly in a time of war, but generally as a whole--I am
    probably the only person in this room who has actually been a
    fraud counsel and ran a fraud program as part of the Defense
    Contract Management Agency--none of us like fraud. We all want
    to address it. How we address it is a process we go through. We
    are going through that process. We certainly don't disagree
    with Mr. Welch that we should have a process, but we are going
    through the process----
        Mr. Bilbray. Title 41, what year did we implement title 41?
        Mr. Drabkin. The rulemaking process in title 41 was part of
    the OFPP Act, and I believe it was passed in 1970.
        Mr. Bilbray. OK. Now, your position is that it is not with
    title 41, it is not with the legislation, the enabling
    legislation. The problem was basically in the rulemaking
    itself, and you are going back and revisiting that within the
    rulemaking process?
        Mr. Drabkin. Yes, sir, and we have made that clear to the
    staff. As I said, we have provided you with copies of----
        Mr. Bilbray. But the intention of the gentleman's
    legislation--this is the vehicle you are using, saying the
    problem was not in the original legislation, it was in a
    process of rulemaking, and so that is why you feel you should
    keep it in the rulemaking process to correct it?
        Mr. Drabkin. Yes, sir, and it also gives us greater
    flexibility. If we discover we have made a mistake in
    implementing it, we can fix it faster than the legislative
    process normally is able to respond. That is not a criticism,
    it is just a reflection of the way Government works.
        Mr. Bilbray. Thank you very much.
        Mr. Chairman, I just think that--remember, we are
    legislators. We are taking the vehicles that we have available
    to us. Obviously, with the rulemaking the way it is, they are
    looking at directing the same issue from their jurisdiction
    because they say it came out of their camp.
        I yield back, Mr. Chairman.
        Mr. Towns. Thank you very much.
        Mr. Welch. Thank you very much, Mr. Chairman.
        You know, I am hearing two things that are contradictory.
    We are hearing that we don't really need legislation because
    the rule is being fixed, but I don't think it is a coincidence
    that there was no action toward fixing the rule until the
    chairman held a hearing and we introduced legislation. Also,
    nobody on the panel is committing to when that final rule is
    going to be published and implemented, so it raises significant
    questions, certainly on my part, as to whether, if we drop the
    pressure, the ball is going to be dropped.
        The other issue that is really of concern to me, Mr.
    Drabkin, you know, I have absolutely no doubt about the quality
    and integrity of the folks that work for our entire Federal
    Government.
        Mr. Drabkin. Thank you, sir.
        Mr. Welch. They work hard. They don't get paid. But, what
    we have here since 2000 is an explosion in these contracts,
    including foreign contracts, including no-bid contracts, and
    the contracting procurement process has gone from $200 billion
    to $400 billion. And, I bet your department and OMB haven't
    received a comparable increase in personnel that they need to
    review contracts.
        Mr. Drabkin. Sir, the number of contracting specialists in
    the Government in 1990 was 33,000 doing $150 billion worth of
    work. Today it is 28,000 doing $450 billion worth of work. The
    problem is we don't have enough people.
        Mr. Welch. That is my point. What you have said, with all
    due respect, is that the fix wasn't in. This wasn't a
    conspiracy, it was a mistake.
        Mr. Drabkin. Yes, sir.
        Mr. Welch. Well, that is not reassuring for taxpayers, and
    we need a remedy. On the other hand, while your numbers to do
    your job have been declining, the membership in the
    professional contractors or services, Ms. Preston's group, has
    been increasing, and there has been some suggestion here by my
    friend from Virginia that it is getting to be a hassle to do
    work with the Government. But, there is a lot of contractors
    that are doing just fine. We had Blackwater in here who
    testified they have done $1 billion worth of contracts and have
    made at least 10 percent of profit. That is not a bad take.
        Mr. Drabkin. Sir, our concern isn't with Blackwater. In
    terms of access to the market, it is not with being able to
    access Blackwater; it is being able to access the IT companies
    who don't do business with the Government, who have solutions
    we would like to buy but who don't want to sell to us because
    of our terms and conditions and the fact that we have turned
    contracting into a criminal matter, not a contractual business
    matter. Although that is no excuse for cheating the Government
    and no one should ever be allowed to do it.
        Mr. Welch. It is something that is very simple here where
    we protect the taxpayer dollars when they are spent abroad as
    well as at home. There has been an acknowledgement on the part
    of three of the four panelists that there, at least, has to be
    a rule, some debate about whether you need legislation. I
    absolutely want to give the benefit of the additional
    protection to the taxpayer, particularly when the agencies that
    are reviewing these contracts are getting squeezed on the
    personnel required to protect the taxpayers.
        I have some confidence that Justice can use appropriate
    discretion so that it will be used wisely and well on behalf of
    the goal of protecting the taxpayers. I reject the position of
    the contractees, the ones who have been paid $400 billion and
    above, that they don't want ``the burden'' of having to accept
    as part of the benefit of $400 billion in taxpayer dollars the
    obligation to share in a timely way with the Government their
    knowledge that taxpayers are being ripped off.
        I yield the balance of my time.
        Mr. Towns. Thank you very much.
        Let me thank all of you for your testimony. Of course, we
    look forward to working with you, because I think we agree on
    one thing: something needs to be done. It is not perfect. I
    think we all agree on that. Of course, I think we can try to
    move from there. So thank you so much, all of you, for your
    testimony.
        Yes, Mr. Denett?
        Mr. Denett. Chairman Towns, we will expedite this proposed
    rule. I heard Congressman Welch say he's concerned that we
    might drop the ball. We won't drop the ball. It is a high
    priority to us. We will move it. We will get it out soon. I
    hope you give us the opportunity to get input from all
    interested parties. We do not need this legislation. Give us a
    turn at bat. You will be pleased with the outcome.
        Mr. Towns. Well, we thank you very much for your comment.
    Of course, as you know, it takes things a while to move around
    here, so we will be watching you as we continue to move,
    because it doesn't happen overnight around here. It really
    doesn't. I wish it did a lot of times.
        Thank you so much, Mr. Denett, Mr. Sabin, Mr. Drabkin, and
    Ms. Preston. I thank all of you.
        I would like to welcome our second panel to H.R. 5787, the
    Moore-Duncan Property Bill. I think it will fix the problem
    that we should not have. A lot of Federal agencies are sitting
    on property that they aren't using, old buildings, antennas,
    and plenty of land. GAO says that agencies have almost $14
    billion in land that they do not need, and there is also about
    $4 billion in land that no one in the Government can use. These
    agencies should dispose of the property. There are better uses
    for the money.
        The problem is that to get the property ready to be sold
    there are a lot of up-front costs. You have to do environmental
    cleanup, demolition, historical preservation, things like that.
    This would cost the agencies a lot, so they just hold on to the
    property, especially since they don't keep the proceeds from
    selling it. The money just goes back into the Treasury.
        Representative Moore from Kansas' bill will allow agencies
    to keep all of the proceeds from selling the property and would
    give GSA funds to take care of the things that have to be done
    first. The agencies would reimburse GSA for those expenses
    after the property is sold.
        I think the bill will go a long way to helping agencies get
    rid of this unneeded property.
        As with the first panel, it is our committee policy that
    all witnesses are sworn in.
        Before we do that, let me yield for an opening statement by
    Ranking Member Bilbray.
        Mr. Bilbray. Thank you, Mr. Chairman.
        Mr. Chairman, I think that this is an issue that both sides
    can work on. I think that one of the sides that really is not
    talked enough about in Washington is the mistakes that have
    been made in the past and try to build onto it. There are a few
    of you that might have been around during the so-called savings
    and loan debacle. I just know for one, as somebody that saw the
    way the Federal Government handled that issue, that the real
    crisis in that situation was not that the savings and loans had
    problems, but that the Federal Government inherited huge
    amounts of real estate assets, and then basically sold it for
    10 or 20 cents on the dollar.
        The taxpayer was literally ripped off, not by somebody
    violating the law, but by agencies not having an incentive to
    get every dollar of value out of real estate assets. There is
    where the real loss of the savings and loan was. And one way to
    be able to point that out is you look around through the tax
    codes of how many people made a fortune off of buying up the
    RTC property and then selling it and managing the property in
    an appropriate way and how much successes were built on the
    backbone of us losing huge amount of resources in real estate.
        So I am encouraged to go through the hearing, take a look
    at the bill as recently introduced, and hopefully we can work
    on this.
        I think that assets unused are assets wasted, and so let's
    see how well we can work this.
        The challenge is for any bureaucracy to be responsive and
    address this issue in a way that will maximize the benefit for
    the taxpayer.
        With that, I appreciate the hearing, Mr. Chairman.
        Mr. Towns. Thank you very much.
        I would like to ask unanimous consent that Congressman
    Dennis Moore be allowed to sit in on this hearing. Of course,
    it is his legislation.
        At this time I would like to yield to Congressman Moore.
        Mr. Moore. Mr. Chairman and Mr. Bilbray, thank you very
    much for the opportunity to be here to join the subcommittee
    today for this hearing to discuss new legislation, H.R. 5787,
    that I have introduced with Mr. Duncan of Tennessee that would
    help address the disincentives that are currently keeping some
    Federal agencies from disposing of assets and property they no
    longer need.
        Last June, the OMB released a report, which found there is
    currently a backlog of more than 21,000 excess and surplus
    Federal properties worth a total of $18 billion. Holding on to
    these properties has serious implications for the a motion
    taxpayer, as it costs Federal agencies billions of dollars each
    year to maintain secure properties that are under-utilized or
    simply not needed.
        Investigations by the GAO have also pointed out that the
    administrative requirements and cost preparing the property for
    transfer or sale continue to hamper some agencies' efforts to
    address their backlog of unneeded properties.
        Because it can be difficult for agencies to secure the
    resources they need to prepare a property for disposal, these
    costs serve as a disincentive, because it makes more sense in
    the short term for them to simply hold on to a property,
    particularly if they do not expect to receive the proceeds of a
    transfer or sale.
        Fortunately, over the past several years the administration
    and Federal agencies have made progress toward strategically
    managing Federal real property by establishing asset management
    plans, standardizing data reporting, and adopting performance
    measures, but I believe there are common sense steps that we
    can take now to ensure that all Federal agencies have the
    proper incentives to dispose of property they no longer need.
        H.R. 5787, the Federal Real Property Disposal Enhancement
    Act, is designed to do that. First, the legislation would move
    to help agencies deal with the administrative requirements and
    costs of preparing under-utilized properties for transfer or
    sale by allowing the GSA, in cooperation with agencies, to use
    its resources and expertise to cover these up-front costs and
    help agencies ensure that title records, property descriptions,
    and environmental clearances are in order. GSA would then be
    reimbursed for all the costs it incurs from the proceeds that
    agencies receive from the transfer or sale of these properties.
        The legislation would also provide agencies with another
    incentive to reduce their inventory of unneeded properties by
    allowing them to keep all the proceeds received from the sale
    of surplus properties, which they could then use for future
    disposal and asset management activities.
        Over half of all land-holding agencies, including the three
    largest land-holding agencies in our Government--Department of
    Defense, GSA, and the Veterans Administration--already have
    this authority to retain proceeds, and it has been shown to be
    a tremendous incentive for some agencies to dispose of property
    they no longer need.
        As we are all aware, the Federal Government faces huge
    fiscal challenges, which is why we must increase our efforts
    both to manage our existing assets more effectively and to
    significantly reduce the inventory of under-utilized Federal
    properties. We should no longer waste precious taxpayer funds
    on maintaining and holding properties that are not needed by
    our Government.
        Again, Mr. Chairman, thank you for the invitation to join
    the subcommittee today. I look forward to hearing from the
    witnesses. Thank you, sir.
        [The prepared statement of Hon. Dennis Moore follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Towns. Thank you very much.
        It is a longstanding policy that we swear in our witnesses,
    so please stand and raise your right hands.
        [Witnesses sworn.]
        Mr. Towns. Let the record reflect that they answered
    affirmatively.
        Danny Werfel is the Acting Comptroller of the Office of
    Federal Financial Management at OMB, so we ask that you go
    first.

        STATEMENTS OF DANNY WERFEL, ACTING COMPTROLLER, FEDERAL
    FINANCIAL MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET; AND STAN
     KACZMARCZYK, ACTING DEPUTY ASSOCIATE ADMINISTRATOR, OFFICE OF
        GOVERNMENT-WIDE POLICY, GENERAL SERVICES ADMINISTRATION

                       STATEMENT OF DANNY WERFEL

        Mr. Werfel. I would like to begin by thanking Chairman
    Towns, Ranking Member Bilbray, Representative Moore, and other
    members of this subcommittee for having the hearing today and
    inviting me to speak.
        The Federal Government is achieving measurable results as
    we work to meet the President's goals of right-sizing the
    Federal real property inventory. In 2004, before the President
    launched the real property initiative, the Federal Government
    lacked a comprehensive inventory of its real property holdings
    and could not effectively identify which assets to target for
    investment or disposal. Today we have a comprehensive inventory
    of more than 1.1 million individual assets with a replacement
    value exceeding $1.5 trillion.
        Agencies are using performance measures, such as whether
    the property is mission critical, the utilization rate of that
    property, the cost and condition of that property, to identify
    assets in need of investment and those unneeded assets suitable
    for disposal.
        Agencies have disposed of more than $7 billion in unneeded
    Federal real property since 2004, and we are moving toward the
    President's goal of disposing $15 billion in unneeded assets by
    the year 2015.
        While we are proud of these accomplishments, there is more
    work to be done. Our inventory shows many surplus assets
    remaining on our books. As long as these assets remain on our
    books, agencies are investing resources to maintain them. Of
    note, our most recent report to Congress shows over 21,000
    surplus and excess assets on the Federal inventory.
        Also importantly, our inventory shows that we have mission
    critical assets with a backlog of repairs and maintenance.
    These backlogs degrade our facilities over time and cause us to
    spend more on maintenance and repairs in the long run. One of
    the anecdotal examples we would like to give is that a roof
    repair may cost $7,000 today to address, but if we don't do
    that and wait, it could cost us $7 million in the near future
    to go ahead and replace that roof.
        As reported by GSA in their written testimony for this
    hearing, six of our largest property-holding agencies have
    backlogs that exceed $16 billion.
        Federal agencies need additional tools and resources to
    address these ongoing challenges. Agency efforts to manage and
    dispose of real property are governed predominately by the Real
    Property Act of 1949. Two critical updates to this legislation
    are needed: first, allowing agencies to retain a portion of the
    net proceeds of sale of unneeded assets and requiring those
    proceeds be reinvested to help fund disposal activities and
    fund our maintenance backlog; and, second, expediting the
    disposition process for our targeted assets.
        I would like to talk briefly about these two reform
    proposals.
        First of all, retention of proceeds. Many agencies do not
    have the authority to retain proceeds, and such proceeds can be
    converted into significant savings for taxpayers. Let me
    explain how: First, proceeds can be used to cover up-front
    costs associated with the disposing of unneeded assets. As
    these assets are removed from the inventory, the costs to
    maintain them are avoided. Second, proceeds can be used to
    address repair and maintenance backlogs, avoiding the
    inevitable higher costs incurred by agencies when these
    backlogs are not addressed timely.
        On to the issue of expedited disposals. The disposition
    process that we operate under today is lengthy and complex. Our
    goal is to streamline that process so that parties interested
    in an asset for a possible no-cost conveyance have greater
    visibility and more timely access to the assets, and properties
    that are not a good fit for a no-cost conveyance can be quickly
    demolished or sold at market so that agencies can more
    immediately terminate the ongoing maintenance costs associated
    with these assets.
        Both of these reforms were proposed as part of a pilot
    program in the 2009 President's budget. We believe that
    enactment of this pilot would both facilitate the disposal of
    surplus property in the short term and help inform Congress and
    the executive branch on our longer-term, permanent reform
    approaches.
        While the administration prefers to enact these two
    reforms, retention of proceeds and expedited disposals,
    together, we are open to working with Congress to consider
    alternative paths. Ultimately, we believe that reform in both
    of these areas is essential and necessary for agencies to
    improve the management of their real property portfolio.
        After my written testimony for this hearing was submitted,
    OMB completed its review of the draft property bill provided to
    us by staff from this committee. I understand that bill has now
    been introduced yesterday and is H.R. 5787. We appreciate you
    and your staff's willingness to consult with us on the draft
    bill, and we respectfully offer the following observations for
    your consideration.
        The draft bill would allow agencies to retain 100 percent
    of the sale's proceeds, a very positive step that we applaud;
    however, the draft bill contains additional language that such
    proceeds ``shall only be expended as authorized in annual
    appropriations acts.''
        If we understand the impact of this particular language
    correctly, proceeds will only be expended for agency real
    property needs if congressional appropriators prioritize such
    funding within their existing spending caps, which are
    sometimes referred to as 302-B allocations. In this regard,
    Federal agencies will face the same challenges they face today;
    that is, dollars needed for real property will be directly
    competing with dollars needed for other discretionary
    priorities.
        The intent of the administration's real property proposal
    was not only to allow agencies to retain proceeds from property
    disposal, but to also provide agencies with the incentive for
    increased flexibility to reinvest those proceeds in the
    properties that have the highest priorities.
        I thank you again for the opportunity to testify today, and
    I look forward to answering your questions.
        [The prepared statement of Mr. Werfel follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Towns. Thank you very much, Mr. Werfel.
        Mr. Kaczmarczyk.

                     STATEMENT OF STAN KACZMARCZYK

        Mr. Kaczmarczyk. Chairman Towns, Ranking Member Bilbray,
    and members of the subcommittee. I am Stan Kaczmarczyk,
    Principal Deputy Associate Administrator for the General
    Services Administration's Office of Government-wide Policy. I
    am pleased to appear before you today to discuss GSA's policy
    support for and operational success in real property asset
    management.
        President Bush signed Executive Order 1327, Federal Real
    Property Asset Management, on February 4, 2004. From the
    outset, GSA has fully supported and participated in the
    implementation of the Executive order. GSA has taken a
    prominent role on the Federal Real Property Council established
    by the Executive order. As one of the Federal Government's many
    land-holding agencies, GSA was proud to be recognized by the
    administration for achieving and maintaining green status on
    the PMS scorecard, the first agency to attain that status.
        In support of the Council, the Office of Government-wide
    Policy developed and maintains the Federal Real Property
    Profile, a centralized real property data base that compiles
    data on more than 1.1 million real property assets with a total
    replacement value of more than $1.5 trillion. The FRPP collects
    24 major data elements, including 4 key performance measures.
        Since 2004, using existing authorities, Federal agencies
    have reported through the FRPP, as Danny mentioned, the
    disposal of more than $7 billion of surplus real property.
        One of the significant asset management challenges
    confronting the Federal Government is the lack of incentives to
    dispose of unneeded real property. For example, some agencies
    are unable to retain and reinvest the proceeds from the sale of
    surplus assets. With a limited amount of financial resources,
    too often the real property inventory becomes a secondary
    priority. This creates a backlog of repair needs and deferred
    maintenance. As Danny mentioned, in 2007 the Government
    Accountability Office found that six land-holding agencies
    reported a backlog for repair and maintenance that totaled over
    $16 billion. If agencies could retain and reinvest the proceeds
    from the sale of surplus real property assets, the funds could
    be used to help addresses this significant backlog.
        In 2005 GSA received the authority to retain all proceeds
    from sales of its surplus properties. Since enactment of this
    authority, GSA has disposed of 42 surplus real property assets,
    with the total sales amount of $155 million. We believe that
    providing all Federal land-holding agencies with the authority
    to retain net proceeds of sale will provide an incentive for
    sound asset management decisionmaking.
        The administration's fiscal year 2009 budget includes
    proposed legislation that would allow agencies, those not
    previously authorized to retain proceeds, the ability to retain
    20 percent of proceeds from the sale of unneeded assets.
        Another disincentive to sound real property asset
    management is that some agencies retain unneeded real
    properties because they cannot afford the up-front costs of
    disposal. A general provision in the administration's fiscal
    year 2009 budget recommends authorizing GSA to pay for and
    provide up-front redeployment services to other agencies to
    help them decide whether to retain and reuse the property or to
    place the asset in the disposal process.
        Federal agencies, under the leadership of the Federal Real
    Property Council, have taken the initial steps to promote the
    efficient and economical use of Federal real property resources
    and to increase agency accountability, but without funds
    necessary to reinvest in or dispose of these assets, they will
    continue to deteriorate as part of the Federal inventory.
        We ask that you consider our legislative proposals to
    improve the real property asset management.
        Mr. Chairman, this concludes my statement. I will be
    pleased to respond to any questions.
        [The prepared statement of Mr. Kaczmarczyk follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Towns. Thank you very much. I want to thank you Mr.
    Werfel and Mr. Kaczmarczyk for your testimony.
        At this time I would like to yield to the ranking member,
    Mr. Bilbray.
        Mr. Bilbray. Thank you, Mr. Chairman.
        Just quickly, the fact is we also don't talk about the fact
    that if we put this back into the private sector, the local
    government benefits from the tax base--not that the Speaker
    would have appreciated us taking the Presidio in San Francisco
    and putting it back on the market, which you can imagine the
    resources we could have gotten for that.
        You made a recommendation, though, and I would ask the
    author of the bill to consider the fact that allowing the
    assets to go back into either the support for maintenance or
    the purchase of new--and keep it within that maintenance and
    that property management side, and I think that the authors
    should keep a real open mind to keep that from getting lost. I
    don't think the intention was for this to get buried. That was
    the whole reason to try to make the maximum on this.
        That is one recommendation we could make up there, and I
    think that we can followup on that working with the author and
    trying to focus the staff. It may not be 100 percent, it may be
    85, like we do with drug asset seizures for the local
    government, but at least focus the resources over on to that
    maintenance aspect of where we are getting this.
        I think there is a way to work this out. I think the bill
    being drafted yesterday just gives us a foundation to work
    with, and I appreciate the positive recommendations from both
    of you.
        Mr. Towns. I would like to yield to the authors of the
    legislation, Mr. Duncan and Mr. Moore.
        Mr. Moore. Thank you, Mr. Chairman. As I mentioned before
    in my statement, in June 2007 OMB reported there is currently a
    backlog of more than 21,000 Federal assets and properties worth
    $18 billion. Does OMB have an estimate of how much Federal
    agencies are spending each year to hold and maintain excess and
    surplus properties they no longer need?
        Mr. Werfel. We do. It is $130 million per year.
        Mr. Moore. That is $130 million?
        Mr. Werfel. Yes, sir.
        Mr. Moore. All right. You also have an estimate for how
    many more Federal properties are unneeded or under-utilized but
    are not yet characterized as excess?
        Mr. Werfel. That we don't have. I think what you are
    talking about, Mr. Kaczmarczyk has it.
        Mr. Moore. As you mention in your testimony, OMB has been
    supportive of proposals to create a pilot program that would
    allow agencies to take excess properties directly to sale,
    essentially allowing them to avoid the required screenings for
    transfer to another Federal agency, homeless use, and public
    benefit conveyance. It seems this proposal is based on the
    premise that the screening requirements are the primary factor
    keeping agencies from disposing of property they no longer
    need. Does OMB have any evidence that this is, indeed, the
    case?
        Mr. Werfel. What we have discussed in the Federal community
    through the Federal Real Property Council are the major
    obstacles that we confront in disposing real property, and two
    themes emerged. One is the agencies look at the process, which
    takes about 240 days to go through, to go through all the
    various public benefit conveyance steps that are necessary, and
    that is, in many cases, a deterrent to having the agencies push
    their properties through for sale.
        In addition, as has been mentioned several times, there are
    up-front costs associated with getting a property ready for
    sale. It can be as simple as moving a large dirt pile from the
    property before they get it ready for sale, but removing that
    dirt pile could cost a couple of thousand dollars that the
    agency doesn't have.
        So really seeing both these obstacles, the length of time,
    the 240 days for public benefit conveyances on average, and the
    proceed issue both present obstacles for agencies.
        Mr. Moore. Thank you.
        Are you aware of the legislation by Senators Carper and
    Coburn that would create a pilot program that would allow
    agencies that disposed of properties through the pilot to keep
    only 20 percent of the proceeds of their sales? Are you aware
    of that?
        Mr. Werfel. We are aware of it. It is very similar to a
    pilot proposal that has been in the President's budget for the
    last few years.
        Mr. Moore. My question then is if most agencies can already
    keep 100 percent of the proceeds, what incentive would they
    have to take part in the pilot program?
        Mr. Werfel. Representative Moore, one clarification about
    your question. First, it is my understanding that a minority of
    our agencies currently have the authority to retain proceeds.
    For example, Veterans Affairs and the State Department have
    such authorities, but many of our agencies, such as
    Transportation, Department of Homeland Security, and many other
    agencies, including the Defense Department for their non-BRAC
    properties, do not have such authority.
        So the 20 percent retention would be a much better
    improvement than what they face today, and that 20 percent
    proceeds could help. I used the dirt pile example--help the
    agencies remove that just for the environment work that is
    necessary. We believe that 20 percent would have a big impact.
        Clearly, 100 percent would go a much further way. It would
    not only allow you to do the up-front cost to get the property
    ready for disposal, which, relatively speaking, would be
    smaller in amount than addressing our real property maintenance
    backlog. So, when you start getting up into the 100 percent
    range, now you are talking about the opportunity to really make
    investments into our infrastructure that not only will improve
    the condition of our facilities, but, as I mentioned, will be a
    positive return on investigation for taxpayers because the
    sooner you repair those facilities the less expensive the life
    cycle cost of those facilities are.
        Mr. Moore. May I ask some very brief questions of the
    gentleman from GSA, Mr. Chairman?
        Mr. Towns. Sure.
        Mr. Moore. Could you describe the trend in the disposal of
    GSA properties that we have seen since the agency was given the
    authorization to retain the proceeds of its sales in 2004? Has
    the agency seen a significant increase in the number of
    properties disposed of since this authorization was given?
        Mr. Kaczmarczyk. The authorization applies to GSA
    properties.
        Mr. Moore. Right.
        Mr. Kaczmarczyk. I don't know if I would say there has been
    a significant increase, but it has certainly been a boon to us
    in being able to retain the proceeds and to reinvest them.
        There has been an increase in recent years, but it has
    basically been as a result of a tiering process that was put in
    by GSA, but we restructured our portfolio to three tiers. The
    ones that we really have a continuing need for that are our top
    priority investments, ones that could reach that category with
    some additional investment, and then a third tier that we
    really should get rid of, we have no use for. That has been the
    real driver for the increase in disposals.
        Mr. Moore. Does GSA have any evidence that the screening
    requirements for homeless use and public benefit conveyance are
    keeping agencies from disposing a property they no longer need?
        Mr. Kaczmarczyk. I wouldn't say evidence. I agree with
    Danny that it is a real concern that comes up in the Federal
    Real Property Council, which is all the Federal land-holding
    agencies getting together to try to increase or improve asset
    management. I am of the mind that if you should get rid of it,
    you should get rid of it, especially if it is costing you money
    to maintain it, even if it takes time to go through the proper
    channels.
        Mr. Moore. Last question, Mr. Chairman.
        Do you feel that another important factor is that it is
    often difficult for agencies to secure the resources they need
    to fund disposal efforts, and that not all agencies are allowed
    to keep the proceeds from sales they do complete? Is that a
    concern?
        Mr. Kaczmarczyk. Yes, that is definitely a concern, and the
    legislation would be a big help in that area.
        Mr. Moore. Thank you, witnesses. Thank you, Mr. Chairman.
        Mr. Towns. Let me thank you for sponsoring the legislation,
    and, of course, let me thank both of you for your testimony.
    Thank you very much.
        On that note, the committee is adjourned.
        [Whereupon, at 4 p.m., the subcommittee was adjourned.]